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White Winston Select Asset Funds, LLC v. Professional Diversity Network, Inc.

Superior Court of Massachusetts, Suffolk, Business Litigation Session

May 31, 2019

White Winston Select Asset Funds, LLC
Professional Diversity Network, Inc.

          Judge (with first initial, no space for Sullivan, Dorsey, and Walsh): Kaplan, Mitchell H., J.


          Mitchell H. Kaplan Justice of the Superior Court

          The plaintiff, White Winston Select Asset Funds, LLC (White Winston), is a private equity firm. The defendant Professional Diversity Network, Inc. (PDN) is a publicly traded corporation organized under the laws of Delaware. On March 30, 2016, White Winston provided financing to PDN in a commercial transaction governed by a Master Credit Facility. As part of this transaction, the parties also entered into agreements pursuant to which White Wintston received warrants to purchase common shares of PDN (the Warrant Agreements). On November 9, 2016, White Winston exercised the warrants and acquired just under three hundred and fifty thousand PDN shares. At the time of exercise, these shares were not registered with the Securities and Exchange Commission (SEC) and the stock certificates for the shares bore a legend stating: "The Shares Represented by this Certificate have not been Registered under the Securities Act of 1933 ..." Thereafter, PDN filed a Form S-1 registration statement with the SEC, which became effective on February 13, 2017, covering the shares. In this action, White Winston alleges that under the Warrant Agreements and Delaware law, PDN had an obligation to provide it with new, unlegended stock certificates on request promptly after February 13, 2017, but failed and refused to do so preventing it from selling the shares in a favorable market for the stock that existed in February and March 2017. It pleads its complaint in five counts: Breach of Contract (Count I); Violation of Delaware statutes Del. UCC Section 8-401 and 8 Del. C. Section 158 (Count II); Breach of the Covenant of Good Faith and Fair Dealing (Count III); Violation of Chapter 93A (Count IV); and Count V (Attorneys Fees).

          The case is now before the court on PDN’s motion to dismiss. For the reasons that follow, that motion is DENIED.


          The following additional facts material to the court’s consideration of the motion are alleged in the complaint and therefore presumed to be true for the purposes of this motion.

          As soon as the S-1 became effective on February 13, 2017, White Winston requested new stock certificates without the restrictive legend. According to White Winston, it was unable to sell its PDN shares in the "robust" market that then existed for them so long as the certificates had the legend on them. PDN, however, refused to issue the new certificates. First, it wrongfully asserted that it could not issue new certificates without a legal opinion issued to its transfer agent that this was permissible, and it was White Winston’s obligation to pay for the opinion. Second, PDN’s CEO and one of its attorneys both told White Winston that there was an internal investigation of board members and officers, this was confidential information, and having been provided this non-public information, White Winston could not sell its shares. Neither the CEO nor counsel told White Winston when the investigation had concluded; White Winston had to learn this information from another source.

          On April 6, 2017, PDN received a legal opinion that certificates without the legend could be issued to White Winston. White Winston presented its legended certificates, but still did not receive the new certificates until May 19, 2016. By this time the opportunity to sell the shares at favorable prices had passed.

          Count I- Breach of Contract and Count III- Breach of the Implied Covenant

          The Warrant Agreement included a provision that stated that PDN "will not ... avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate in order to protect the rights of [White Winston] against material impairment."

          PDN, however, argues that there is no specific provision in the Master Credit Facility or the Warrant Agreement that requires PDN to deliver share certificates without a legend that states that the shares are not registered with the SEC. That is true. However, the Warrant Agreements include multiple provisions all designed to require PDN to register the shares as soon as practicable, including registering the shares pursuant to a Form S-3 when requested by White Winston, if PDN is eligible to do so, and registering them in any states in which White Winston wished to sell them. Accordingly, a refusal to deliver unlegended certificates to White Winston after the shares were registered, when no legal impediment to delivering the clean certificates existed, could constitute either a breach of the contract provision quoted above or the covenant of good faith and fair dealing that is implied in every contract.

         Under Massachusetts law the implied covenant arises out of a contract between parties, but does not create rights or duties beyond those the parties agreed to when they entered into the contract. See Ayash v. Dana-Farber Cancer Inst., 443 Mass. 367, 385, 822 N.E.2d 667, cert. denied sub nom. Globe Newspaper Co. v. Ayash, 546 U.S. 927, 126 S.Ct. 397, 163 L.Ed.2d 275 (2005). However, the covenant ensures that the parties act in good faith so that neither does "anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract." Druker v. Roland Wm. Jutras Assocs., Inc., 370 Mass. 383, 385 (1976). Here, at this early stage of the litigation, taking the allegations of the complaint in the light most favorable to White Winston, the allegations plausibly suggest that among the fruits of the financing transaction that the parties entered into was the grant of warrants for shares of PDN stock that White Winston could sell as soon as PDN was practicably able to register them. After the S-1 was effective, PDN failed to act in good faith when it refused to provide unlegended certificates to White Winston and, for its own purposes, deprived White Winston of the ability to sell the shares of these publicly traded securities when the prices were high. Perhaps, PDN feared that the sale of White Winston’s large block would depress share prices, but that remains for factual development through discovery. In any event, whether considered a breach of PDN’s broad contractual obligations not to materially impair the rights granted White Winston under the loan documents or a breach of the implied covenant, a claim is stated.

          Count II- Breach of Delaware Statutory Law

          White Winston has clearly stated a viable claim for violation of two interrelated Delaware statutes: 8 Del. C. § 158 and § 8-401 of Delaware’s version of the UCC. In Bender v. Memory Metal, Inc.,514 A.2d 1109, 1115 (Del.Ch. 1986), Vice Chancellor Jacobs ...

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